Opinions on Loan

shore72April 16, 2003

We are preparing to build an addition; my wife & I are 30, the house is owned free and clear (inherited). I hate to borrow money but we really need the space. The house was appraised last year at 70K. The maximum we are willing to spend is 60K although I am going to try and hold the cost to 50K or less. Here is what is on the table so far:

1)Our credit union (my wife works there) offers a home equity loan @ 5.5% variable, 15 years (60K)

2)Credit union home equity line of credit is 6.5% fixed (15 yrs, up to 60K)

3)An aquaintance has approached me, offering to loan the money. Initially we talked about 35K/10 years for 5.5%; to do 60K/15 years he wants 7.25% fixed.

The CU will accept the appraisal we have, the private individual does not need one, he also reminds me "no points" and other cost savings. All else being equal I would go with him but the interest rate scares me off. I havn't shopped around any further. I welcome any advice!

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I frankly am uneasy at borrowing money from private individuals--particularly on that scale. My reservations would come mostly from the concept that not everyone who loans or borrows money has a businesslike approach to it, and you can end up souring personal relationships around you in ways you can't see now.

That said, I'm sure that a properly executed loan agreement, vetted by a lawyer, would protect you as well as a standard agreement from a credit union.

It seems to me that this is what home equity is for--to provide something you can use to create substantial improvements, so I'd say don't worry so much about hating the idea of borrowing.

Once you add on, will your house be worth that much $ more? Or close enough?

(you know what you're willing to spend; do you know what you'll NEED to spend to get what you want?)

And how much ARE the points w/ the credit union? I don't know how to do the math, but over the life of the loan, would they be less important than that interest-rate difference?

(HELOCs have the advantage, I've been told, that you draw them out only if and when you need them, so if you pay $20,000 as a downpayment to your contractor, you don't start paying interest on the OTHER $30,000 until you actually withdraw it --that might lower your total cost in interest paid. (plus you can start paying it back right away, true also of a simple equity loan, I assume)

    Bookmark   April 16, 2003 at 1:05PM
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I appreciate the advice. When talking again to the private lender they have agreed to match 5.5% so we are looking carefully at this. They have financed a number of people, handled through a local lawyer.

The house will just barely be worth the money, or just under, but this includes several upgrades to the whole house, including 200 amp service, new 40 year shingles on whole house (and removing the 3 layers there now) and new seamless guttering all around, and a few other details; in this seller's market we havn't found our "dream home" at our "dream price", everthing in our price range seems to have a fatal flaw! (bad neighborhood, fixer-upper, full of asbestos, concrete block walls,etc.)

    Bookmark   April 17, 2003 at 8:35AM
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A heloc is a good way to go, I say no to the private person, use an institution, get the tax deduction at the end of the year, and no messy problems, just a nice business deal.

    Bookmark   April 17, 2003 at 7:03PM
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Borrowing to go on vacation or to buy food are consumer loans - nothing on hand tomorrow to show for the expenditure.

I don't like such loans - if you couldn't live on your income last year, how will you be able to do it next year? During which you have the extra expense of interest on the loan that you used to buy stuff that now has disappeared.

Borrowing to buy the table on which to put the food is a loan of a capital nature - you'll be able to eat from that table in twenty-five years' time.

During part of the life of which you'll be repaying the loan - but you keep on getting value for the cost involved. Very often the goods bought with the loan go on providing value for you long after the loan has been repaid.

If you'll be able to enjoy a happier, less crowded or in other way(s) a more satisfactory life ... and can handle the repayment of the loan to repair and upgrade your home - it sounds like a good deal, to me.

Lots of your friends are paying on a mortgage (undergirded by an asset with less relative value) to buy their basic home. You are borrowing to not only maintain it at its earlier standard but to upgrade, as well.

Part of which may well result in current and continuing increase in value of the asset.

Suggest that, rather than taking on a separate life insurance contract, which are of decreasing value as the loan is repaid, that you consider adding to current (I hope term) life contract(s), which will cost less per $100,000. of coverage.

Better consider long-term disability, as well - how will you pay your mortgage should you become disabled for a substantial period?

Or unemployed for an extended period? That won't be covered by disability insurance - but it sure makes it important to make sure that you build an emergency fund enough to keep you alive for six months to a year, should your income stop due to job loss.

Just some thoughts that may help you consider other viewpoints while working toward your decision.

Good wishes to you and yours,

joyful guy

    Bookmark   April 17, 2003 at 8:15PM
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Unless the various tasks are rather necessarily inter-related, how about doing some of the more important ones soon, e.g. roof renovation (if it's leaking or probably about to), expansion so that your family isn't living like in a sardine can, etc.

Leaving some of the less important ones till later - when you have the (much smaller) loan paid off, or nearly so.

How about doing some of the work yourself, e.g. replacing roof?

If you don't know how, check out the library - books there tell you how to do anything. Some housebuilding products suppliers offer seminars.

Ask a number of your friends whether they know people who know how to replace a roof, then pick their brains. Most folks like to talk about something they know to a rapt audience.

Do you have any idea whether some of the roof is damaged under the covering, so would need repair? Unless that's quite substantial, you should be able to handle that, as well.

If you clear off shingles, you'll need to cover the open part with a tarpaulin (which you may well be able to borrow, in the community). You'll need to have it extend up over the peak of the roof. And need to hold it down with blocks, old tires, or something to deter the wind that frequently accompanies rain.

I've written this some place just lately - hope it isn't a useless duplication. Was it something that disappeared when my computer blocked up?

Good wishes to you and yours (soon to be in a more suitable home, we hope),

joyful guy/Ed

    Bookmark   April 18, 2003 at 4:30PM
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Shore72, I am confused by your statement that the house will be barely worth what you are putting into it. You said it already appraised at $70K, and you are spending maybe as much as $60K on an addition and renovations. Things like a new roof won't help the value, because those are maintenance items that all houses need, but the addition surely will. So, it's hard to imagine going wrong here.

The only downside I can see to the private individual is that the loan will not show up on your credit report; possibly that could be messy later if you want to refinance or something. Also, could there be personal issues with refinancing, or if you had to be late on a payment?

Also, I'd definitely agree with your original plan of getting everything done at once, with the original loan. Then it'll be over with and you can enjoy your house, and it'll all be rolled into the one payment.


    Bookmark   April 19, 2003 at 5:52AM
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If I spend 60K on my 70K house its still a little iffy whether the house would be worth 130K, but as you said, some of this is maintenance. After much thought I don't feel so bad spending the money. My apprehension comes from having so many things given to me, I've never owed money or even paid rent. But my wife & I looked at the budget, and I quickly realized that $500/month will be easy to swallow, heck, she was paying $400 for rent herself before we married!

We plan on doing some work ourselves, some teardown work, all the painting, some other finish work, really anything along the way we can handle. The contractor we are talking to seems flexible on this. The roof on the existing house isn't that bad, could go maybe 10 years (put on about 1990, just a standard grade of shingles but in good shape now) but the roof will be somewhat tricky to tie into & it would be good to just get that over with now.

Regarding the financing, the actual private individual I would borrow from is not a close friend, I have met him once or twice in passing. I am dealing through his daughter, who is more of a friend, but not that close. But I do consider what could happen if a problem occurs, if she inherits the mortgage, etc. Beleive me, I've seen what can happen, my father once borrowed money from my grandfather, caused many ill feelings, even though Dad was never late with a payment.

Hopefully we can make a decision in the next few days and get things rolling. A little more careful thought, some prayers...thanks all!

    Bookmark   April 19, 2003 at 9:47PM
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The way I'd be looking at it, the $60,000 you're spending doesn't have to make the house worth $130,000 in order to be a great deal. Even $20,000 goes for maintenance items and the other $40,000 adds to the value, then you have a $110,000 house that you paid $60,000 for. Where are you going to get a deal like that?

This guy you're borrowing the money from, he doesn't look anything like Tony Soprano, does he? Just kidding.


    Bookmark   April 19, 2003 at 10:09PM
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I think you can do better with the interest rate. My bank is currently offering 3.74% six month intro rate for a HELOC that jumps to prime (currently 4.25%) after the intro period. This is a variable rate loan. It is only this low if you keep the LTV ratio at 75%. I've received promotional material from other local banks that advertise similar super low rates for LTV ratios of 75% that jump up a point between 75%-90%, and jump up 2 points for anything with a LTV ratio above 90%. I think if you can keep your loan at or below 75% of the value of the house, then you can do better with the rate. Check with the credit union and at local banks. 75% of $70,000 is $52,500. That's pretty close to what you need. If you really need more, you could try to get your house re-appraised part way through the remodel in order to get the line of credit increased while maintaining your lower interest rate.

I would stick with the bank or credit union over the individual for several reasons (some already mentioned, some not.)
1. HELOCs have no points and usually no fees anyway.
2. If you go with the institution the loan will show up on your credit reports. As long as you pay on time, your credit scores will skyrocket.
3. If you go with the institution you'll have definitive proof that you paid interest and your yearly interest statement is sure to be accurate. This is essential if you want to claim the deductions on your tax return (and why wouldn't you.)
4. If you want to make additional payments of principle, the institution is more likely to calculate your new balance correctly. A private individual may get confused and annoyed if you frequently make additional payments towards principle.
5. Even if you keep it all business, sometimes circumstances occur that make it difficult to deal with individuals.

Here is a link that might be useful: My bank's website w/HELOC info

    Bookmark   May 3, 2003 at 6:01PM
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